Regulation
1 Global Capital Charged With Fraud by SEC
August 29, 2018
The Securities & Exchange Commission unsealed a 10-count complaint against 1 Global Capital LLC (“1st Global Capital”), its owner Carl Ruderman, and related parties on Wednesday.
The South Florida firm “fraudulently raised more than $287 million from more than 3,400 investors to fund its business offering short-term financing to small and medium-size businesses,” the complaint begins.
Investors were offered low-risk, high-return investments that 1st Global would use to fund merchant cash advance deals. Ruderman, who owned the company through a trust, misappropriated $35 million of the funds, paying a lot of it to himself and companies he controlled that had nothing to do with MCA, the SEC alleges. Beyond that, millions more went towards other pet projects like a $50 million purchase of distressed credit card debt.
But the deception went deep, the complaint lays out. 1st Global touted a default rate of only 4% despite the fact that 15-18% of their deals over the last 2 years had resulted in collections lawsuits.
By October 2017, the statements investors received showing their monthly performance were faked with the value and performance significantly inflated. By June 2018, one line item on monthly statements (labeled “cash not deployed”) reported that investors collectively had $70 million in idle cash ready to be put into deals. Meanwhile, the company itself only had about $20 million in all of its bank accounts combined, money that was being used for everything including operating expenses, salaries, and commissions.
1st Global’s alleged auditor, Daszkal Bolton, LLP, says they never audited 1st Global’s statements and haven’t had anything to do with the company since 2016. Nonetheless, 1st Global placed Daszkal Bolton’s name on statements given to investors and stated on their website that investor balances were validated by an accounting firm quarterly.
The Seven-Minute Loan Shakes Up Washington And The 50 States
August 19, 2018
It takes seven minutes for Kabbage to approve a small-business loan. “The reason there’s so little lag time,” says Sam Taussig, head of global policy at the Atlanta-based financial technology firm, “is that it’s all automated. Our marginal cost for loans is very low,” he explains, “because everything involving the intake of information – your name and address, know-your-customer, anti-money-laundering and anti-terrorism checks, analyzing three years of income statements, cash-flow analysis – is one-hundred-percent automated. There are no people involved unless red flags go off.”
One salient testament to Kabbage’s automation: Fully $1 billion of the $5 billion in loans that it has made to 145,000 discrete borrowers since it opened its portals in 2011 were made between 6 p.m. and 6 a.m.
Now compare that hair-trigger response time and 24-hour service for a small business loan of $1,000-$250,000 with what occurs at a typical bank. “Corporate credit underwriting requires 28 separate tasks to arrive at a decision,” William Phelan, president, and co‐founder of PayNet—a top provider of small-business credit data and analysis – testified recently to a Congressional subcommittee. “These 28 tasks involve (among other things): collecting information for the credit application, reviewing the financial information, data entry and calculations, industry analysis, evaluation of borrower capability, capacity (to repay), and valuation of collateral.”
A “time-series analysis,” the Skokie (Ill.)-based executive went on, found that it takes two-to-three weeks – and often as many as eight weeks—to complete the loan approval process. For this “single credit decision,” Phelan added, the services of three bank departments – relationship manager, credit analyst, and credit committee – are required.
The cost of such a labor-intensive operation? PayNet analysts reckoned that banks incur $4,000-$6,000 in underwriting expenses for each credit application. Phelan said, moreover, that credit underwriting typically includes a subsequent loan review, which consumes two days of effort and costs the bank an additional $1,000. “With these costs,” Phelan told lawmakers, “banks are unable to turn a profit unless the loan size exceeds $500,000.”
According to the National Bureau of Economic Research, the country’s very biggest banks — Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo—have been the financial institutions most likely to shut down lending to small businesses. “While small business lending declined at all banks beginning in 2008,” NBER’s September, 2017 report announces, “the four largest banks” which the report dubs the ‘Top Four’—“cut back significantly relative to the rest of the banking sector.”
NBER reports further that by 2010—the “trough” of the financial crisis—the annual flow of loan originations from the Top Four stood at just 41% of its 2006 level, which compared with 66% of the pre-crisis level for all other banks. Moreover, small-business lending at the “Top Four” banks remained suppressed for several years afterward, “hovering” at roughly 50% of its pre crisis level through 2014. By contrast, such lending at the rest of the country’s banks eventually bounced back to nearly 80% of the pre-crisis level by 2014.
That pullback—by all banks—continues, says Kenneth Singleton, an economics professor at Stanford University’s Graduate School of Business. Echoing Phelan’s testimony, Singleton told deBanked in an interview: “Given the high underwriting costs, banks just chose not to make loans under $250,000,” which are the bread-and-butter of small-business loans. In so doing, he adds, banks “have created a vacuum for fintechs.”
All of which helps explain why Kabbage and other fintechs making small business loans are maintaining a strong growth trajectory. As a Federal Reserve report issued in June notes, the five most prominent fintech lenders to small businesses—OnDeck, Kabbage, Credibly, Square Capital, and PayPal—are on track to grow by an estimated 21.5 percent annually through 2021.
Their outsized growth is just one piece—albeit a major one—of fintech’s larger tapestry. Depending on how you define “financial technology,” there are anywhere from 1,400 to 2,000 fintechs operating in the U.S., experts say. Fintech companies are now engaged in online payments, consumer lending, savings and investment vehicles, insurance, and myriad other forms of financial services.
Fintechs’ advocates—a loose confederacy that includes not only industry practitioners but also investors, analysts, academics, and sympathetic government officials—assert that the U.S. fintech industry is nonetheless being blunted from realizing its full potential. If fintechs were allowed to “do their thing,” (as they said in the sixties) this cohort argues, a supercharged industry would bring “financial inclusion” to “unbanked” and “underbanked” populations in the U.S. By “democratizing access to capital,” as Kabbage’s Taussig puts it, harnessing technology would also re-energize the country’s small businesses, which creates the majority of net new jobs in the U.S., according to the U.S. Small Business Administration.
But standing in the way of both innovation and more robust economic growth, this cohort asserts, is a breathtakingly complex—and restrictive—regulatory system that dates back to the Civil War. “I do think we’re victims of our own success in that we’ve got a pretty good financial system and a pretty good regulatory structure where most people can make payments and the vast majority of people can get credit.” says Jo Ann Barefoot, chief executive at Barefoot Innovation Group in Washington, D.C. and a former senior fellow at Harvard’s Kennedy School. But because of that “there’s been more inertia and slower adoption of new technology,” she adds. “People in the U.S. are still going to bank branches more than people in the rest of the world.”
Barefoot adds: “There are five agencies directly overseeing financial services at the Federal level and another two dozen federal agencies” providing some measure of additional, if not duplicative oversight, over financial services. “But there’s no fintech licensing at the national level,” she says. And because each state also has a bank regulator, she notes, “if you’re a fintech innovator, you have to go state by state and spend millions of dollars and take years” to comply with a spool of red tape pertaining to nonbanks.
At the federal level, the current system— which includes the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)—developed over time in a piecemeal fashion, largely through legislative responses to economic panics, shocks and emergencies. “For historical reasons,” Barefoot remarks, “we have a lot of agencies” regulating financial services.
For exhibit A, look no further than the Consumer Financial Protection Bureau created amidst the shambles of the 2008-2009 financial crisis by the 2010 Dodd-Frank Act. Built ostensibly to preserve safety and soundness, the agencies have constructed a moat around the banking system.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington, D.C. consultancy, is a banking policy expert who frequently provides testimony to Congress and regulatory agencies. She wrote recently that the country’s banking sector has been protected from the kind of technological disruption that has upended a whole bevy of industries.
“The only reason Amazon and its ilk may not do to banking, brokers and insurers what they did to retailers—and are about to do to grocers and pharmacies,” she observed recently in a blog—“is the regulatory structure of each of these businesses. If and how it changes are the most critical strategic factors now facing finance.”
Cornelius Hurley, a Boston University law professor and executive director of the Online Lending Policy Institute, is especially critical of the 50-state, dual banking system. State bank regulators oversee 75 percent of the country’s banks and are the primary regulators of nonbank financial technology companies. “The U.S. is falling behind other countries that are much less balkanized,” Hurley says. “Our federal system of government has served us well in many areas in our becoming a leading civil society. It’s given us NOW (Negotiable Order of Withdrawal) accounts, money-market accounts, automatic teller machines, and interstate banking. But now it’s outlived its usefulness and has become an impediment.”
Take Kabbage, which actually avoids a lot of regulatory rigmarole by virtue of its partnership with Celtic Bank, a Utah-chartered industrial bank. The association with a regulated state bank essentially provides Kabbage with a passport to conduct business across state lines. Nonetheless, Kabbage has multiple, incessant, and confusing dealings with its bank overseers in the 50 states.
“Where the states get involved,” says Taussig, “is on brokering, solicitation, disclosure and privacy. We run into varying degrees of state legislative issues that make it hard to do business. Right now we’re plagued by what’s been happening with national technology actors on cybersecurity breaches and breach disclosures. We are required to notify customers. But some states require that we do it in as few as 36 hours, and in others it’s a couple of months. We’ve lobbied for a national breach law of four days,” he adds, which would “make it easier for everyone operating across the country.”
Then there’s the meaning of “What is a broker?’” says Taussig, who as a regulatory compliance expert at Kabbage sees his role as something of an emissary and educator to regulators and politicians, the news media, and the public. “The definitions haven’t been updated since the 1950s and now we have wildly different interpretations of brokering and solicitation,” he says. “The landscape has changed with e-commerce and each state has a different perspective of what’s kosher on the Internet.”
Washington State is a good example. It’s one of a handful of jurisdictions in which regulators confine nonbank fintechs to making consumer loans. In a kabuki dance, fintech companies apply for a consumer-lending license and then ask for a special dispensation to do small-business lending.
And let’s not forget New Mexico, Nevada and Vermont where a physical “brick-and-mortar” presence is required for a lender to do business. Digital companies, Taussig says, would have to seek a waiver from regulators in those states. “Many companies spend a lot of money on billable hours for local lawyers to comply with policies and procedures,” Taussig reports, “and it doesn’t serve to protect customers. It’s really just revenue extraction.”
All such restraints put fintechs at a disadvantage to traditional financial institutions, which by virtue of a bank charter, enjoy laws guaranteeing parity between state-chartered and federally chartered national banks. The banks are therefore able to traverse state lines seamlessly to take deposits, make loans, and engage in other lines of business. In addition, fintechs’ cost of funds is far higher than banks, which pay depositors a meager interest rate. And banks have access to the Fed discount window, while their depositors’ savings and checking accounts are insured up to $200,000.
The result is a higher cost of funds for fintechs, which principally depend on venture capital, private equity, securitization and debt financing as well as retained earnings. And that translates into steeper charges for small business borrowers. A fintech customer can easily pay an interest rate on a loan or line of credit that’s three to four times higher than, say, a bank loan backed by the U.S. Small Business Administration.
Kabbage, for example, reports that its average loan of roughly $10,000 typically carries an interest rate of 35%-36%. It’s credits are, of course, riskier than the banks’. The company does not report figures on loans denied, Taussig told deBanked, but Stanford’s Singleton says that the fintech industry’s denial rate is roughly 50 percent for small business loans. “Fintechs have higher costs of capital and they’re also facing moderate default rates,” notes Singleton. “They’re not enormous, but fintechs are dealing with a different segment. Small businesses have much more variability in cash flows, so lending could be riskier than larger, established companies.”
Even so, venture capitalists continue to pour money into fintech start-ups. “I’ve gone to several conferences,” Singleton says, “and everywhere I turn I’m meeting people from a new fintech company. One of the striking things about this space,” he adds, “is that there are lot of aspiring start-ups attacking very specific, very narrow issues. Not all will survive, but someone will probably acquire them.”
Contrast that to the world of banking. Many banks are wholeheartedly embracing technology by collaborating with fintechs, acquiring start-ups with promising technology, or developing in-house solutions. Among the most impressive are super-regionals Fifth Third Bank ($142.2 billion), Regions Financial Corp. ($123.5 billion), and BBVA Compass ($69.6 billion), notes Miami-based bank consultant Charles Wendel. But many banks are content to cater to familiar customers and remain complacent. One result is that there’s been a steady diminution in the number of U.S. banks.
Over the past ten years, fully one-third of the country’s banks were swallowed whole in an acquisition, disappeared in a merger, failed, or otherwise closed their doors. There were 5,670 federally insured banks at the end of 2017, according to the Federal Deposit Insurance Corp., a 2,863-bank, 33.5% decrease from the 8,533 commercial banks operating in the U.S. in 2007.
It does appear that, to paraphrase an old expression, many banks “are going out of style.” In recent years there have been more banking industry deaths than births. Sixty-three banks have failed since 2013 through June while only 14 de novo banks have been launched. In Texas, which is known for having the most banks of any state in the country, only one newly minted bank debuted since 2009. (The Bank of Austin is the new kid on the Texas block, opening in a city known as a hotbed of technology with its “Silicon Hills.”)
One reason there’s so little enthusiasm among venture capitalists and other financial backers for investing in de novo banks is that regulators are known to be austere. “If you’re a company in the U.S.,” says Matt Burton, a founder of data analytics firm Orchard Platform Markets (which was recently acquired by Kabbage), “and you tell regulators that you want to grow by 100 percent a year – which is the scale you must grow at to get venture-capital funding – regulators will freak out. Bank regulators are very, very strict. That’s why you never hear about new banks achieving any sort of scale.”
But while bank regulators “are moving sluggishly compared to the rest of the world” in adapting to the fintech revolution, says Singleton, there are numerous signs that the status quo may be in for a surprising jolt. The Treasury Department is about to issue (possibly by the time this story is published) a major report recommending an across-the-board overhaul in the regulatory stance toward all nonbank financials, including fintechs. According to a report in The American Banker, Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, told a trade group that the report would address regulatory shortcomings and especially “regulatory asymmetries” between fintech firms and regulated financial institutions.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association—a Washington, D.C. trade association representing the country’s Main Street bankers—told deBanked that, among other things, the Treasury report would likely recommend “regulatory sandboxes.” (A regulatory sandbox allows businesses to experiment with innovative products, services, and business models in the marketplace, usually for a specified period of time.)
That’s an idea that fintech proponents have been drumming enthusiastically since it was pioneered in the U.K. a few years ago, and it’s something that the independent bankers’ lobby, whose member banks are among the most threatened by fintech small-business lenders, says it too can support. Treasury’s Phillips “has said in the past that he’d like to see a level playing field,” the ICBA’s Cole says. “So if (regulators) are going to allow a sandbox, any company could be involved, including a community bank. We agree with him, of course, because we’d like to take advantage of that.”
In March, 2018, Arizona became the first state to establish a regulatory sandbox when the governor signed a law directing that state’s attorney general (and not the state’s banking regulator) to oversee the program. The agency will begin taking applications in August with approval in 90 days, says Paul Watkins, civil litigation chief in the AG’s office. Watkins told deBanked that he’s been most surprised so far by “the degree of enthusiasm” from overseas companies. With the advent of the sandbox, he adds, “Landlocked Arizona has become a port state.”
The OCC, which is part of the Treasury Department, may also revive its plan to issue a national bank charter to fintechs, sources say (EDITOR’S NOTE: This had not yet been implemented before this story went to print. The OCC is now accepting such applications) – a hugely controversial proposal that was put on ice last year (and some thought left for dead) when former Commissioner Thomas J. Curry’s tenure ended last spring. At his departure, the fintech bank charter faced a lawsuit filed by both the New York State Banking Department and the Conference of State Bank Supervisors. (Since then, the lawsuit was tossed out by the courts on the ground that the case was not “ripe” – that is, it was too soon for plaintiffs to show injury).
Taussig, the regulatory expert at Kabbage, reports that the Comptroller of the Currency, Robert J. Otting, has promised “a thumbs-up or thumbs-down” decision by the end of July or early August on issuing fintechs a national bank charter. He counts himself as “hopeful” that OCC’s decision will see both of the regulator’s thumbs pointing north.
The Conference of State Bank Supervisors, meanwhile, has extended an olive branch to the fintech community in the form of “Vision 2020.” CSBS touts the program as “an initiative to modernize state regulation of non-bank financial companies.” As part of Vision 2020, CSBS formed a 21-member “Fintech Industry Advisory Panel” with a recognizable roster of industry stalwarts: small business lenders Kabbage and OnDeck Capital are on board, as are consumer lenders like Funding Circle, LendUp and SoFi Lending Corp. The panel also boasts such heavyweights in payments as Amazon and Microsoft.
Working closely with the fintech industry is a “key component” of Vision 2020, Margaret Liu, deputy general counsel at CSBS, told deBanked in a recent telephone interview. CSBS and the fintech industry are “having a dialogue,” she says, “and we’re asking industry to work together (with us) and bring us a handful of top recommendations on what states can do to improve regulation of nonbanks in licensing, regulations, and examinations.
“We want to know,” she added, ‘What the main friction points are so that we can find a path forward. We want to hear their concerns and talk about pain points. We want them to know the states are not deaf and blind to their concerns.”
Can Fintech Startups Become Banks? OCC Opens The Gates
August 1, 2018
Yesterday, the U.S. Treasury Department released a report that prompted the Office of the Comptroller of the Currency (OCC) to say that it would start accepting applications from fintech for special purpose national bank charters.
This is boon for fintech companies that, until now, have mostly been prevented from applying for national bank charters because of protest from banks and others that they will not be subject to adequate regulations. But now the OCC, a significant regulator, is opening the door for non-depository fintech companies – like OnDeck and Kabbage – to become banks.
“Over the past 150 years banks and the federal banking system have been the source of tremendous innovation that has improved banking services and made them more accessible to millions,” said head of the OCC, Comptroller of the Currency, Joseph M. Otting, in a statement. “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy…Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
The main advantage for fintech companies of having the opportunity to get their own bank charter is that they would now be able to operate nationwide under a single licensing and regulatory system, instead of a myriad of state licenses. Currently, fintech companies must adhere to the regulations in each state where they do business, which can be expensive. And some states have regulations that are stricter than others. That is why this news is bad news for states that feel that this development will allow fintech companies to bypass and undermine their regulation designed to protect consumers.
The OCC’s decision is the latest development in a years long, sustained effort by fintechs to become banks. In fact, for the last several years, Fintech companies have tried attaining bank status by getting the Utah Department of Financial Institutions to allow them to become Industrial Loan Company (ILC) banks. So far, Square, SoFi and NelNet have tried, in some capacity, to become an ILC bank.
The New York Department of Financial Service and the Conference of State Bank Supervisors (CSBS) was angered by the OCC’s decision.
“An OCC fintech charter is a regulatory train wreck in the making,” said CSBS President John W. Ryan in a statement. “Such a move exceeds the current authority granted by Congress to the OCC. Fintech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed fintechs.”
He said that his organization is keeping all options open to stop what he says is regulatory overreach.
The OCC indicated in its announcement that fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other banks. But these special purpose banks would not have to abide by the stricter regulations of deposit-taking banks and they would not have to be insured by the Federal Deposit Insurance Corporation (FDIC) either.
“It is hard to conceive that insured national banks will allow the OCC to allow a fintech entity a national bank charter without insisting that all national bank obligations apply—which is what fintech companies want to avoid,” said Joseph Lynyak, partner and regulatory reform specialist at the law firm Dorsey & Whitney.
Elevate Explains Why Ohio Payday Law Won’t Hurt Them
July 31, 2018
In Elevate’s Q2 2018 conference call yesterday, Chairman and CEO Kenneth Rees mentioned that Elevate wasn’t worried about an Ohio bill, signed into law yesterday, that places significant restrictions on what payday lenders can do in the state.
The Fairness in Lending Act (House Bill 123) will close a loophole that payday lenders have been using to bypass the state’s 28 percent maximum APR on loans. The law will go into effect at the end of October of this year.
“We don’t believe this legislation will have a material impact on our business for a couple of reasons,” Rees said on the earnings call. “First, the law would only impact our RISE product…and we believe we can migrate most of our RISE customers in Ohio into an Elastic loan or a Today Credit Card.”
Elevate’s RISE product provides unsecured installment loans and lines of credit, while the company’s Elastic product, its most popular, is a bank issued line of credit. Elevate’s Today Credit Card, a partnership with Mastercard, was just launched and is unique in that it offers prime-like features to subprime customers.
The other reason why Rees is not very concerned about the new law is because he said that that RISE Ohio only represents less than five percent of the company’s total consolidated loan balances. Rees said that there may even be opportunity resulting from Ohio’s new Fairness in Lending Act because he said the law will likely reduce credit availability, potentially creating increased demand for Elevate’s Elastic and Today Card products, which he indicated would be acceptable under the new law. The new law does the following:
- Limits loans to a maximum of $1,000.
- Limits loan terms to 12 months.
- Caps the cost of the loan – fees and interest – to 60 percent of the loan’s original principal.
- Prohibits loans under 90 days unless the monthly payment is not more than 7 percent of a borrower’s monthly net income or 6 percent of gross income.
- Prohibits borrowers from carrying more than a $2,500 outstanding principal across several loans. Payday lenders would have to make their best effort to check their commonly available data to figure out where else people might have loans. The bill also authorizes the state to create a database for lenders to consult.
- Allows lenders to charge a monthly maintenance fee that’s the lesser of 10 percent of the loan’s principal or $30.
- Requires lenders to provide the consumers with a sample repayment schedule based on affordability for loans that last longer than 90 days.
- Prohibits harassing phone calls from lenders.
- Requires lenders to provide loan cost information orally and in writing.
- Gives borrowers 72 hours to change their minds about the loans and return the money, without paying any fees.
Apart from brief discussion of the minimal impact of this new Ohio law, Elevate shared its Q2 revenue of $184.4 million, a 22.5 percent increase over last year at the same time.
CA Bill to Revise Definition of Broker: 6/27/18 Hearing Transcript & Video (AB 3207)
July 29, 2018AB 3207 – CA Bill to Revise the definition of broker (6/27/18)
[0:00:02]
Bradford: We started as a subcommittee. We've already heard Assembly Member Arambula’s Bill AB 1289. Do we have a quorum? We’re gonna ask the secretary to call the roll and establish the quorum.
Speaker: Senator Bradford.
Bradford: Here.
Speaker: Bradford here. Vidak.
Vidak: Present.
Speaker: Vidak here. Gaines. Galgiani.
Galgiani: Here.
Speaker: Galgiani here. Hueso.
Hueso: Here.
Speaker: Hueso here. Lara.
Lara: Here.
Speaker: Lara here. Portantino.
Bradford: Quorum is established. So, we have only one other vehicle that will be heard today. That’s AB 3207 by Assembly Woman Limon and she is here present. And when you’re ready, Ms. Limon, you can make your presentation.
Limon: Great. Thank you, Chair. I wanna start off by taking the committee amendments and committing to work on any concerns addressed in the committee analysis. AB 3207 will provide important consumer protections for the thousands of consumers and small business owners who are served by finance lenders and brokers licensed under the California Financing Law. Under existing law, the definition of broker is vague and circular, leading to the confusion from lenders about which entities they can partner with when arranging loans. Further, the definition of broker in existing law was formulated long before the rise of the internet and the evolution of online lead generation. So, our laws need to be updated with this online activity in mind. Lead generators provide valuable marketing services to a wide range of industries and this bill contains a specific exemption clarifying that distribution of marketing materials or factual information about a lender is not a broker brokering activity. However, many online lender generators that serve the lending industry provide more than just marketing services. These entities act as brokers when they bring borrowers and lenders together to arrange a loan based on confidential data provided by a consumer or small business owner. This bill will allow online lead generators to continue to operate in California. Simply, this bill requires 3 basic things from these companies. One, get a business license from the State Department of Business Oversight; two, provide transparent disclosures to the customers; and three, obtain your customer’s consent before selling and transmitting their confidential data. Arguments from the opposition that this bill will cause lead generators to leave the state raise an important question. Why would a bill focused on licensure and transparency cause a small business to leave a very lucrative California market? Over the past 5 months, I have worked extensively with lenders and lead generators to ensure that this bill appropriately addresses the consumer protection concerns in our lending markets without placing unnecessary burdens on the businesses that work in this area. None of these companies have threatened to leave the state. In fact, many of them have applauded the efforts to bring clarity to existing law and bring bad actors out of the shadows and into the light. This bill has the support of consumer and commercial lenders, the Department of Business Oversight, and a coalition of consumer advocates who are here today to voice their support. With me, I have Adam Wright, senior counsel in the enforcement division in the Department of Business Oversight, to answer any questions from the committee.
Bradford: Witnesses and support, please come forward. State your name, organization.
Martindale: Chair Member, Suzanne Martindale with Consumers Union. We do support this measure and really appreciate the author's leadership in seeking to ensure that our laws stay up to date in terms of evolving technologies. Of course, a lot of lending now happens online and the business models have shifted, but that does not mean that consumers are not, you know, any less entitled to receiving protections when third parties acting on behalf of lenders are marketing to them and helping facilitate the origination of loans and also in particular handling sensitive information and the kinds of things that we wanna always ensure are protected. So, we understand that there’s potentially more discussion to be had about finding the sweet spot here, but I really, really think that the time is now to move forward and ensure that the DBO has the enforcement tools that it needs to properly regulate the space so that consumers who receive online loans are no less protected than those who get them in brick and mortar stores. So, for these reasons, we support and request an aye vote.
Bradford: Thank you. Additional witnesses and support.
Coleman: Good afternoon. Ronald Coleman here on behalf of the California Low Income Consumer Coalition (CLICC). Also here in strong support.
Bradford: Thank you.
Aponte-Diaz: Hi. Graciela Aponte-Diaz, Center for Responsible Lending. Also in strong support.
Bradford: Thank you.
Joyce: Hello. Pat Joyce on behalf of Credit Karma. Credit Karma actually has a neutral position on the bill and wanted the opportunity to thank the author and sponsors of the bill for working with us to address our concerns and allow us to remove our opposition. So, thank you.
Bradford: Thank you very much. Next witness.
Preity: Sumanta Preity on behalf of OnDeck Capital. In support of the bill.
Bradford: Thank you.
Glad: Margaret Glad on behalf of NerdWallet.
[0:05:01]
We’re also in that tweener category. We’d been working very productively with the author's office and particularly Mr. Burdock. We appreciate their amendments that they’ve made to date to address NerdWallet’s concerns. We have a couple of more issues related to disclosures as the bill currently stands. They are mandated disclosures that don't represent our business model. We’d have to tell consumers we’re doing things we aren't doing. So, we're continuing to work with the author and his and her staff to resolve those issues. We appreciate the committee's thorough analysis and all the work and hope to come to resolution of our remaining issues.
Bradford: Great. Thank you.
Pappas: Emily Pappas on behalf of Lending Tree. Similar position to what Margaret just said. Our client has generally supported the framework on this bill. We virtually had an opposed and less amended position due to some of the disclosure requirements. However, we learn from the author's office today that they'd be willing to take the amendments that relieve us of our concerns. Therefore, we’ll switch to a neutral position.
Bradford: Thank you. Any additional witnesses in support? Witnesses in opposition.
Quinton: Hi. David Quinton on behalf of the Online Lenders Alliance. I do have a clarifying question. We are in strong opposition as the bill was in print. We've heard discussion about amendments. If all of the amendments that were in the analysis were accepted, I think that moves us to neutral, but we're not clear on that at this point. So, I’m not sure how to proceed.
Bradford: Those are the amendments that we’re referring to that weren’t announced as well as we’re addressing the concerns that we’re raised as well in the bill.
Quinton: Would that be possible so we can—
Bradford: I’m sorry?
Quinton: Oh, she was— I’m sorry. I was listening.
Bradford: Ms. Galgiani.
Bradford: Yeah. Yeah. If you want to, Ms.—
Quinton: Okay. Thank you.
Galgiani: I would just like to clarify with the author the amendments that have been agreed to and looking through the analysis and then trying to complete which all of those are. I wanna make sure that we're on the same page; the author, the members, the opposition. And there are two concerns that I’ll start with that we don't have expressed amendments for, but we're hoping that you'll work with the opposition and your stakeholders over the July break and we can come back and address those. And one is dealing with lead generators being designated assets as opposed to being referred to as brokers and that those lead generators hold the generator licenses. That's a concern. And the other concern is imposing the same standard of liability on lead generators for the acts of those from whom they buy leads as the bill imposes on lenders for the acts of lead generators from whom they buy leads.
Limon: So, I can say that we continue the conversations. it's definitely not a problem. I think that, you know, this bill has gone through 6 rounds of amendments. And so, I think that's reflective of the fact that we continue to have the conversation. On the two separate license definitions, what we know is that creating two separate license licenses for brokers and lead generators would require many companies to attain two separate licenses from the DBO. Additionally, drafting a separate regulatory framework for lead generators would also add confusion for the businesses that would need to decide whether they need a lead generator or a broker license. The bill does require to have one license right now. And the bill provides specific disclosure requirements that makes sense in terms of the online generation world. So, that's kind of where we've been thinking about it in terms of that. In terms of the lender liability, the bill and existing law hold licensees accountable for their own actions. So, both the lenders and the brokers are liable for violations of the law that occur within their companies. For licensed brokers who choose to obtain referrals from unlicensed third party, the bill requires those brokers to establish policies and procedures intended to ensure that those unlicensed parties uphold the consumer protections provided by the law. The issue of the lender liability raised in the analysis is a red herring. Just as existing current law, the bill would continue to practice the practice of holding licensees accountable for their own violations. And I just wanna again say that that's current law.
Galgiani: Okay. So, am I hearing—
Limon: You are hearing that we are happy to continue those conversations. You brought up the two concerns and I wanted to share the feedback on those two concerns.
Bradford: But we're still open to move forward in having— resolve our differences as it relates to the two— those two concerns. We’re not gonna split the baby here today, but we’re gonna try to figure out how to move forward on those concerns.
[0:10:03]
So, we have that commitment as we move forward to address it in a way that we all come together. Am I correct?
Limon: You have the commitment to continue the conversation to try to figure out a way to address it.
Bradford: Yes, sir.
Quinton: So, on the issue of the two remaining issues, so we thank the author for taking the amendments as presented by your consultant in the analysis. But of the two remaining issues, I believe the broker issue is one that we can work with. That's fine. The devil is in the details. The problem is with this issue, as you know, the details have details. It’s a very, very complex issue. So, that’s our one concern, but we can work with the broker issue. I think we’re okay with that. That's fine as it is. However, being held for strict liability for the actions of a third party affiliate is a very far reaching legal standard and we have really serious concerns with that. So, we just wanna clarify if it is still that we are held with strict liability for the actions of a third party affiliate like we would still have to oppose the bill with that. So, I just want clarification on that, Mr. Chairman.
Bradford: Well, as far as that concern, I'm hoping we're gonna sit down at the table again during the break and whittle that out and figure out how we come to consensus. And I understand your concerns and that's why they're still listed as concerns. They haven't been amended in the bill. But hopefully, going forward, we will find some solution or amendment to address that for you.
Quinton: So, I think at this point— to finish my statement and I’ll hand it over very briefly to Jason— at this point, I would say that we would still be opposed until we can see that amendment because that is a very, very serious issue that could hold us liable over issues we have no authority over. And I’d like to introduce Mr. Jason Romrell who is with Lead Smart, one of the leading lead generators in the State of California.
Romrell: Thank you. Chairman and committee members, thank you for allowing me to speak on AB 3207. The thing that I want to make clear, we’re a California-based lead generator. We have a sister company that has a DTL and CFL license. We’ve had those for the last 5 years. Our interest in this bill is not to oppose to bill. It’s to make sure that the good lead generators, the lead generators who function ethically are still allowed to function in fintech environment that is becoming the movement. If we don't do that, we are putting consumers at a huge disadvantage. In fact, we’re putting them at more risk than they’re at now. We have been involved in this discussion with the DBO, with members of the legislature, and even on the federal level for many years. So, the role that we play as a good ethical lead generator is a very important consumer protection role. We have the same objective as Assembly Member Limon. We have the same objective as the DBO. It's to protect consumers. So, the issues that we were facing prior to the amendments being put forward were in the details. There is no opposition to the concept. We want to be here to protect consumers, but it is the details. So, the one thing I do want to mention is lead generation is complex. There a lot of layers to it. It is not a one size fits all activity. And that is one of the challenges in crafting good legislation. So, I'm not going to go into the details that we had issues with because I think, in light of these potential amendments, everything has changed. But what I do wanna point out is the distinction between the good lead generators and the bad lead generators. The good lead generators already do a lot of what is in AB 3207. We get consent. We vet our lenders. We make sure the marketing message that goes to the consumer is accurate, truthful, and proper. We do a lot of that work, and it's time consuming, and it takes a lot of money and energy. The bad lead generators do not care. So, the risk we run with legislation is if we over legislate the good guys. We will. And Assembly Members Limon asked the question “Why would a small business leave California?” If we can't function without the threat of class action lawsuits, if we literally cannot comply with the details of a bill, we’ll move to other markets. If we do that, consumers are injured severely. So, my plea to this committee and to Assembly Member Limon is we are here. We are invested in the process. We want to get it right. We don't want to oppose the bill. We want to make it work for us and for California consumers.
[0:15:02]
And that is our position, is to protect the people that we live and work with everyday.
Bradford: Thank you. Any additional witnesses in opposition?
Bauer: Paul Bauer on behalf of Elevate. I’m kind of in that tweener category that other people have step forward in. I just wanted to lend our voice to those of Mr. Quinton and Mr. Romrell who presented. And we also wanna see the bill be perfected as we move forward. So, I look forward to that work.
Bradford: Thank you. I appreciate it.
Sunley: Alex Sunley on behalf of the Small Business Finance Association. In opposition.
Bradford: Thank you.
Damar: Hi, Dominic Damar here on behalf of Innova. I share Mr. Bauer’s and [0:15:49][Inaudible] position relative to the amendments and look forward to working and hearing from the author on changes to be made. Thank you.
Bradford: Thank you.
Conaway: Good afternoon. This is Jerry Conaway on behalf of Lead Flash. And we're currently in opposition, but looking forward to seeing the amendments. And I'm working with the bill's author to make a great bill. Thank you.
Bradford: Thank you.
Smeltzer: Thank you, Mister Chair and members. Jason Smeltzer here on behalf of the California Financial Service Providers. Also the same position as Mr. Quinton. I would love to see the assembly member and work this out and remove our opposition then.
Bradford: Thank you.
Schriver: Rachel Schriver with the TMX Finance Family of Companies. We’re opposed to the bill in print, but certainly optimistic about finding a path forward.
Bradford: I appreciate it. Any additional witnesses? Any tweeners? All right. We’ll bring it back to the committee. Any questions by the committee members? Mr. Ric Lara. No. Oh. Oh okay. Ms.—
Lara: I just wanna move the bill, but I know Ms. Galgiani—
Galgiani: I wanted to finish and—
Bradford: Yes. Oh, go ahead, Ms. Galgiani.
Galgiani: We’ve done a lot of work on this bill—
Bradford: Yes, we have.
Galgiani: …today and I’ve been in two other committees today since 9 o’clock this morning. So, I wanna make sure we’re on the same page. So, the second item amendment that would provide exemptions from lead generator definition for administrative and clerical tasks, credit bureaus, internet search engines, and social media platforms, has that amendment been agreed to? That's on Page 14B in the analysis. Page 14B addresses the concern. And so, the amendment would be to provide an exemption for those clerical staff, etc.
Wright: And this is Adam Wright on behalf of the DBO. When it comes to that request, we do not believe it's necessary because of the way that the activities are already drafted. We do not believe that it covers search engines or social media advertisements because those two mediums of advertisements do not send actual consumer data to lenders and they are not paid on a per successful loan basis. Thus, they would not be caught up on the activities under a broker.
Galgiani: Okay. Okay. So, what is the amendment that you're taking then because it sounds like no? Am I right or— Maybe we should start with the author sharing with us the amendments that she’s taking because—
Bradford: You know, we’ve spent a whole lot of time in all due respect to the author and to those who are opposing this bill, but a lot of time have been invested here. And we wanna have a vehicle that first protects consumers, but also allows the industry to thrive and survive here in California. And I think the amendments that we've put forth I thought we had understanding and a commitment that we're gonna continue to move forward and keep this vehicle alive and understanding that we have some kind of agreement, but—
Limon: So, here's the deal, right? So, if you look on Page 13 and it says amendments and it describes some of the issues, but there's not specific amendments. So, according to the author’s office, the use of the word “expresses” intends to [0:18:54][Inaudible] consent. Right? We can go on. And so, I think that that’s what we have to continue talking about. Because in the areas where there is very specific things, it’s easier to say yes or no. In the areas where it talks about a concern, but it doesn't give you actual language, that's where we're trying to figure out how.
Bradford: And we’re not gonna find that extra language here today. What we're trying to get clarity on is what has been put forth in analysis those concerns that were raised as well as those amendments that we suggested that we get agreement on that today and we’ll work out the details moving forward with the understanding that we come to agreement, we’ll pull this bill back to the committee.
Limon: Yes. We can provide clarity for all of these amendments. We are just looking for actual language.
Galgiani: Are we drafting those amendments in committee? Committee staff will draft those amendments.
Bradford: Yes.
Limon: Can we draft the amendments and provide them to you?
Bradford: No. I think this committee will work in concert with you in drafting those amendments. That's our understanding of finding common ground on what we have already in analysis.
[0:20:01]
Limon: As long as our office and as the author I’m able to also be part of that, I—
Bradford: That’s our understanding that we’re gonna work in collaboration as we move forward on this thing.
Galgiani: Okay.
Bradford: Galgiani.
Galgiani: Okay. Next, item #4 on my list of concerns in amendments, define term “express consent” and provide the express consent provided by a prospective borrower to one entity satisfies the requirement for all other entities that purchase a consumer's confidential data to obtain express consent and that is addressing the concern outlined on Page 13A of the analysis.
Limon: So, back to the concerns, we’re happy to have a conversation. I’m trying to go to the amendments. So, we are happy to clarify it. So, here’s the confusion, right, that you have some amendments and we've agreed to take those and to work together and then you have the concerns. And the concerns I think need a discussion. We weren't prepared to go back and forth on the concerns here.
Bradford: We’re not trying to do that. So, we're trying to get clarity on those amendments that have been identified, but also address those concerns moving forward as well the two areas of concerns that are being raised so we can keep this vehicle alive and continue our discussion. So, we're—
Limon: We’re I think on the same page that the concerns we need to keep talking about the amendments, we are agreeing to work together on language.
Bradford: I understand that. We have specific amendments that we’re trying to get agreement on today. The concerns, we can work out. You know, that's going forward, but the amendments that we have before, today, we’re trying to get clarity on it. Senator Lara.
Lara: Without skipping over Senator Galgiani, my understanding is that she's already agreed to the amendments.
Galgiani: And we're trying to clarify what those amendments are—
Lara: Okay.
Galgiani: …specifically so that we don't just leave it to the fact that there's going to be a discussion—
Lara: Understood. Understood.
Galgiani: …in July. We want clarity on very specific amendments.
Limon: I started by saying I agree to the amendments. And so, if there are, you know, clear amendments, that's easy because there's language. If there's not language, we have to have a discussion. And what I heard was that we were simultaneously gonna draft those, that language.
Galgiani: And I'm trying to go through those amendments item by item so that we're on the same page and the two that I outlined—
Bradford: Ms. Galgiani, I think what we’re gonna have discussion on and negotiations is on the concerns, but the amendments or the amendments that we’re trying to get commitment on today, the amendments that we have that we're in an analysis that were clearly spelled out in analysis, you're taking those.
Limon: Yes.
Bradford: Great.
Galgiani: And the committee staff is drafting this.
Bradford: Yes. Yes.
Limon: With collaboration from our office so we—
Bradford: That’s right.
Limon: …can draft them together.
Galgiani: Okay. Okay. So, I’ll continue to the fifth one. Requiring that the entity that collects a prospective borrower’s confidential data to provide that borrower with the disclosure described in section 22348. So, in essence, the original point person who collected the personal information is the person who is required to provide the disclosure.
Limon: Uh-huh.
Galgiani: Okay. Number 6, add two additional statements to the disclosure described in section 22348 (A) lenders to whom the prospective borrower is referred may separately contact the prospective borrower and (B) lenders to whom the prospective borrower is referred may separately contact the prospective borrower.
Limon: Yup.
Galgiani: Okay. Number 7, delete the disclosure required under Section 22338.5.
Limon: So, wait—
Galgiani: Okay. And that’s on Page 23—
Limon: You know, I have agreed to the amendments whether it’s clear language. And so, yeah.
Bradford: Okay.
Limon: I think that this feels like it’s leading into a conversation and I just— We wanna have that conversation.
Bradford: Well, I’m gonna go on record right now. The amendments that we have before that was in analysis, I wanna be clear those are the ones you’re agreeing to and we’ll continue to work out the concerns. Am I correct?
Limon: Yes.
Bradford: And if we deviate from that, we will pull the bill back to this committee.
Limon: Right. And we will work together on drafting the language so that it's not just— Right?
Bradford: Drafting the language as it relates to the concerns. Yes. If we all have agreement on that—
Lara: [0:24:51][Inaudible]
Bradford: Exactly. So, we’re taking the amendments that are in the committee’s analysis.
[0:25:00]
That’s the motion you're putting forth, Ms. Galgiani.
Galgiani: Yes.
Bradford: Yes. Yes. Okay. Great. Any additional questions or comments by committee?
Speaker: As amended.
Bradford: As amended. Ms. Limon, would you like to close?
Limon: Unlicensed brokering activity poses a risk to consumer’s financial well-being and this bill will ensure that California's financial regulator can enforce the consumer protections under the California Financing Law. For this reason, today, I ask you for an aye vote.
Bradford: So, we have a motion and it’s do pass as amended to appropriations based on committee analysis. And we will move forward in addressing the concerns as we move forward. Am I correct? So, that’s the understanding then, Secretary, of our amendment. Madam chief consultant, that’s our understanding? Great. All right. Do pass as amended and committee analysis. Madam Secretary, please call the roll.
Speaker: Assembly Bill 3207, motion is do pass as amended to appropriation. Senator Bradford.
Bradford: Aye.
Speaker: Bradford Aye. Vidak.
Vidak: No.
Speaker: Vidak no. Gaines. Galgiani.
Galgiani: Aye.
Speaker: Galgiani aye. Hueso.
Hueso: Aye.
Speaker: Hueso aye. Lara.
Lara: Aye.
Speaker: Lara aye. Portantino.
Portantino: Aye.
Speaker: Portantino aye. We have 5 to 1.
Bradford: All right. Your bill is out.
Limon: Thank you.
Bradford: Thank you. And we look forward to our continued discussion and work on this issue.
[0:26:28] End of Audio
BCFP Launches Regulatory Sandbox for Fintech Companies
July 23, 2018
Mick Mulvaney, the Acting Director of the Bureau of Consumer Financial Protection (Bureau), told The Wall Street Journal last week that the Bureau has launched a “regulatory sandbox” to help fintech firms develop new products and services.
A regulatory sandbox is a framework set up by a regulator that allows certain fintech companies to conduct experiments for innovative products under the supervision of the regulator. The launch of this BCFP regulatory sandbox coincides with the hiring of Paul Watkins last week as Director of the Bureau’s new Office of Innovation.
It would seem no coincidence that Watkins was chosen to direct this new office at the Bureau because he had been in charge of fintech initiatives at the Attorney General’s Office in Arizona, the first state to create a regulatory sandbox earlier this year. Illinois is the process of creating a regulatory sandbox. And state banking regulators in New England spoke to deBanked last year about the possibility of a regional regulatory sandbox. According to an American Banker story, the model for the sandbox follows a 2014 initiative in the UK called Project Innovate, designed to promote competition while focusing on consumer interests. Currently, regulatory sandboxes have been implemented in other countries, including Abu Dhabi, Australia, Canada, Denmark, Hong Kong and Singapore, according to the New York University Journal of Law and Business.
Regulatory sandboxes are controversial. Before the Arizona bill passed allowing for the creation of the regulatory sandbox, a number of consumer advocacy groups protested, including the Southwest Center for Economic Integrity, Arizona Community Action Association, Children’s Action Alliance, and Protecting Arizona’s Family Coalition. These groups believe that the regulatory sandbox is simply a way of allowing fintech companies to bypass regulations at the expense of consumers.
Mulvaney wouldn’t agree. “You can make a strong argument…that new technology actually offers new and innovative ways to protect consumers,” Mulvaney said in The Wall Street Journal story.
Commercial Financing Disclosures Bill – June 25 CA Assembly Debate, Video, and Transcript
July 21, 2018Commercial Financing Disclosures Bill – Assembly Banking and Finance Committee
[0:00:03]
Limon: We didn’t put any time limits on it, but I will ask for brevity in comments that are made. So, with that, I will have you begin, Senator.
Glazer: Thank you, Chair Limon. Senate Bill 1235 would give to small business owners many of the same protections that our country’s truth in lending laws have given consumer borrowers for more than half a century. This bill would require lenders and finance companies to provide clear and consistent disclosure to small business owners when they offer them financing and when they close a deal. This information would help small business owners understand the cost and the consequences of the financing options available to them in the rapidly evolving commercial lending market. Until now, our truth in lending laws have applied only to consumer finance. Business owners were left to fend for themselves on the theory that they were sophisticated merchants who understood the world of finance. Increasingly, however, that is no longer true. Today’s small business owners are often immigrant entrepreneurs struggling to get their enterprises off the ground with little knowledge of the finance industry. Traditional banks, meanwhile, are no longer interested in making smaller loans. Instead, that space is being filled by innovative lenders offering an array of financial options. This new online lending industry is bringing capital to people who badly need it, but there are abuses. This bill offers a modest measure, disclosure to help level the playing field for small business owners. It would make California a leader in placing the interests of small business owners on par with the big players in the financial industry. Now, if you borrowed money for a house or a car or simply taken out a personal loan or used a credit card, you’ve seen the kind of disclosures that this bill would require. They tell you how much you’re borrowing, all the fees you’ll be paying, how long it will take you to repay the loan, and the annual annualized interest rate. The lenders know all this information already. Some of them even disclose it in the financial markets when they package their small business loans and sell them as securities. All we’re asking is that they disclose the same information to their customers. What’s good for Wall Street should be good enough for Main Street. How this bill has undergone extensive changes since I first introduced it in February, we’ve taken suggestions from many of the players in this industry and for most of the opponents, but will never satisfy everyone. Many of the companies that lend to small business simply do not want to disclose the terms of their loans to their customers. And many consumer finance advocates want this bill to precisely mirror the laws that govern consumer lending even if that might not be practical for the business lending market. Let me finish up. I think we’ve struck the right balance in this bill. It requires clear consistent disclosure, but does not restrict the kind of financing that lenders can offer and will not lead to any loss of access to capital in the small business world. With me today are Robyn Black representing the California Small Business Association and Caton Hanson who is a cofounder of nav.com, a company that helps small business owners navigate the tricky new online lending marketplace.
Hanson: Thank you, Chair Limon and members of the committee, for allowing me to share my support of this bill. My name is Caton Hanson, cofounder and chief legal compliance officer at nav.com. Now, as a small business credit and finance platform used by more than 370,000 business owners in the United States including 35,000 in the State of California, I’m speaking to you today because I believe this bill is an important step towards helping small business borrowers more easily compare sources of capital, which ultimately means more successful business in California. Consider the impact this legislation can have. Small business employs nearly half of all of California State’s employees. But according to the U.S. Department of Labor, 100,000 California small businesses close each year. And the data show a top reason these businesses fail is due to poor credit arrangements. I cofounded Nav for the very reason of bringing transparency and efficiency to business financing credit. I come from a small business family. My grandfather started a pool plastering company in Southern California 1948. My cousin runs the same business today. Growing up, I watched my father work a full-time job and run a small business on the side. As a small business owner of 2 businesses prior to Nav, I’m intimately aware of the help this bill would provide small business owners. I’ve seen their struggle on a daily basis and have been in their shoes. I know what it’s like to feel like the success of your business hang on whether you have the right financing or not. Transparency and efficiency are essential in the business lending world. If you haven’t experienced it, it’s easy to say the borrower will figure it out.
[0:05:00]
They know what they’re doing. The reality is that small business owners are not financial experts. These are not Fortune 500 companies we are talking about. In fact, 75 percent% of all small businesses employ one or fewer people. These are businesses without a finance department. running a business and having to perform finance, HR, sales, product development is extremely taxing. Business owners can’t spend hours and hours trying to decipher loan disclosures. That’s why an annualized cost of capital needs to be a part of this legislation. It’s the best method we have to create a quick applies to apples cost comparison. We’ve had this protection for consumers for years. It’s already settled law. The bill’s opposition claim an annualized cost of capital will confuse borrowers. The fact is that an annualized rate, which includes all costs, will simply reveal how expensive some of these products can be. If this forces them to explain the difference between short term versus long-term capital and the effect that has on an annualized rate, then so be it. It’s better than the current system that puts all the burden on the small business owner. We’ve already agreed that using an annualized rate is the best way for consumers to compare loans. Why should it be different for small business owners? Most reputable business lenders already provide an annualized rate because they know it’s the best way for a borrower to compare loans and terms. Alternative lenders such as Kabbage, OnDeck, and SmartBiz Loans are using tools such as a SMART box to provide necessary disclosures. They know it’s the right thing to do. This bill is just a way to standardize and require this across the industry so that the few bad apples can’t continue to deceive business owners. This bill isn’t about regulating the cost of business loans or trying to harm business lenders, which we wouldn’t support. There are legitimate times when a triple digit annualized rate is a smart decision for a business owner, but the business owner deserves to have a clear way of comparing products and knowing how much it’s going to cost them. If the terms are transparent and the business owner makes a bad decision, then it’s on them. To claim educating a small business owner on the true cost of capital is a harm to them is simply ridiculous. Unlike the opponents, we have nothing to gain by passing this bill. We just know it’s the right thing to do. We also believe it can become a model for the entire country and will positively impact millions of business owners, their families and communities. On behalf of the 100 team members at Nav along with our 35,000 small business customers in the State of California, I urge you to pass the bill. Thank you.
Limon: I will ask for a quorum. Before we finish up, if we can just call a quorum.
Speaker: Limon.
Limon: Here.
Speaker: Limon here. Chen. Acosta.
Acosta: Here.
Speaker: Acosta here. Burke. Gabriel.
Gabriel: Here.
Speaker: Gabriel here. Gloria. Gonzalez Fletcher.
Gonzalez Fletcher: Here.
Speaker: Gonzalez Fletcher here. Grayson.
Grayson: Here.
Speaker: Grayson here. Steinorth.
Steinorth: Here.
Speaker: Steinorth here. Stone. Weber.
Weber: Here.
Speaker: Weber here.
Limon: Thank you. We’ll have you proceed.
Black: Good afternoon, Madam Chair and members of the committee. Robyn Black on behalf of the California Small Business Association. We are a nonpartisan nonprofit organization representing small business in California. Many of you were at our luncheon last week with your honorees. We love small business. We celebrate small business. And we really wanna thank the Senator for bringing this bill forward. As all of you know, access to capital is the most important challenge facing small business in California and startup businesses in particular in California as has already been stated. That transparency that this bill would provide for small businesses looking for that kind of capital specially in the new markets online is something that’s really important. I won’t repeat everything that’s already been said, but informing the consumers, giving them the transparency that is already there for consumer loans in California, providing it for small businesses, many of whom are not as sophisticated in the finance laws and the understanding what the true cost of a loan or borrowing money can be. This will go a long way to help those individuals. So, on behalf of the California Small Business Association, we thank you for your time and we urge your aye vote.
Speaker: Thanks, Robyn. Thank you.
Limon: Any opposition? Or support. Sorry. We’ll start with support. If you could please state your name and association.
Speaker: [0:09:31][Inaudible] On behalf of the Small Business Finance Association, support of the bill.
Limon: Any additional support? All right. Those in opposition.
[Talk Out of Context]
[0:09:59]
Patterson: Good afternoon, Madam Chair and members of the committee. My name is Ann Patterson. I’m a partner at Orrick, Herrington & Sutcliffe, an outside council for the Innovative Lending Platform Association. I feel like I’m in theater at the round here. [Laughter]. We’re here regretfully in opposition to SB-1235 because of the inclusion of the untested new metric, the ACC, that is in the bill. The ILPA is the leading trade association for small business lending and service companies and our members include OnDeck Capital, Kabbage, and The Business Backer. I wanna start by making it clear that we do not oppose SB-1235 subjective here and its attempts to create disclosures. We absolutely support transparency. And actually, as the witness from Nav mentioned, all members of the ILPA already provide borrowers with a comprehensive disclosure. It’s called the SMART box. It looks a little bit like the Schumer box. Or for those of you more familiar with Cheerios, the nutritional label on the back of that. We spent about 18 months developing the SMART box and worked in consultation with small businesses to identify the metrics that were most meaningful to them when they were trying to compare between financial products and then you can see those metrics reflected here. We have total cost of capital at the top, which is usually ranked as one of the highest and most meaningful for folks. We disclosed APR (annual percentage rate), average monthly payments, cents and dollar, and whether there are any prepayment penalties. So, I’m sure you probably can’t see this from here. I’m happy to provide— I brought copies if people would like to see it more closely. So, we did make these disclosures voluntarily because we want our small business customers to be informed so that they can pick the right financing product for their use cases and we do believe I think, as the author and the other witnesses, that transparency is critical to that. But we strongly SB-1235’s inclusion of this untested new metric, the ACC or EACC, because we believe that it will frustrate rather than facilitate an apples to apples comparison across products. And here is why. Let me find my little card. [Laughter]. As you can see, APR and ACC look a lot alike. They’re both percentages, which is gonna cause confusion for borrowers. And these two here, APR and ACC, are for the exact same loan. One 6-month 50,000-dollar loan with the exact same interest and fees. As you can see, APR 33.6, ACC 22.63. One’s looking a lot higher than the other for the exact same loan with the same costs. So, this is basically ACC is APR, but smaller. That to us is sort of like introducing a new food measurement for example where I can look at Cinnabon and say, “Oh, it doesn’t have 900 calories anymore. It has 600 calories.” And I think just like that would drive people to make bad food decisions. This ACC is gonna potentially mislead borrowers into choosing potentially more expensive products because they’re gonna conflate APR and ACC. And the danger is gonna occur here because borrowers are gonna be comparing different products. One quoted with APR and one ACC. Lots of things are still gonna be quoted in APR. The Schumer box in your credit card is still gonna have APR. And I can tell you the credit that small business customers are gonna confuse them when they’re looking at one that says APR 33 and one that says this. And it’s just lower. It’s like buying the Cinnabon. Right? Suddenly, you’re gonna pack the one that looks lower even though in fact it’s not the actually less expensive product. It’s just a different metric entirely. So, the problem is going to I think not go away over time with this because we are gonna continue to live in an ecosystem where APR remains, you know, the prominent metric. So, people are going to be really doing apples to oranges comparisons between APR and ACC. And for us, this isn’t actually just speculation. I think I mentioned we did a lot of homework when we developed SMART box over 18 months. And one of things we did is actually considered putting a second percentage metric, the AIR, into the SMART box. So, it would have had one more percentage here. And when we shared that with small business customers, it immediately caused confusion. They’re like “Which one is the real one? Which one is the right one?” And so, it just led to a ton of questions. And so, we ultimately said only one percentage-based metric on this because it’s just gonna confuse people. And so, I think the concern for us is that we’re either now in a position as the ILPA of having to drop APR entirely and replace it with this new metric, which is untested from our perspective. I don’t know anyone who’s ever used it. I don’t know if there had been any studies on whether or not it actually kind of works over time. So, we either are going to replace it or we can go back to a situation where we are gonna have to have 2 percentages on the SMART box again, which we know based on our own back information does cause confusion for people.
[0:15:07]
So, in closing, we support the concept here. We believe in transparency and disclosure, but we are very concerned that this metric will be confusing for people. I’m happy to answer any questions.
Limon: Thank you.
Fisher: Thank you. Chair Limon and committee members, thank you for the opportunity to present testimony today regarding SB-1235. My name is Kate Fisher. And I am here today on behalf of the Commercial Finance Coalition, a group of responsible finance companies that provide capital to small and medium sized businesses through innovative methods. We support California’s efforts to provide business financing disclosures. CFC members already disclose the cost of financing and welcome all of the disclosure requirements of SB-1235 except for one. That is the estimated annualized cost of capital disclosure. For clarity, we do not oppose disclosure. Instead, we’re advocating for an effective and accurate disclosure. Our concern is that requiring any annualized percentage for financing that is not alone will mischaracterize the underlying transaction. Senator Glazer’s bill recognizes that requiring an estimated annualized cost of capital disclosure does not make sense for other non-loan products such as commercial leasing or invoice factoring. Commercial leasing is completely exempt from SB-1235. And invoice factoring is exempt from the annualized cost of capital disclosure. That is because commercial leasing and invoice factoring are not loans, but SB-1235 proposes to require an annualized cost of capital disclosure for future receivables factoring, also not loan. This is illogical. Future receivables factoring is fundamentally different from a loan. The business pays only a percentage of its receivables. For example, when wildfires swept across California last fall, a business that was damaged and could not operate would owe nothing. Because the transaction is not a loan, any APR or annualized cost of capital disclosure would only confuse and mislead small business owners. I’m very optimistic that California can lead the way in providing businesses with disclosures that are helpful and not misleading. For example, the disclosure in SB-1235 that would require the disclosure of total dollar cost of financing, which is currently in the bill in Section 22802 (b) (3). Thank you.
Limon: Thank you. Any other witnesses in opposition? Please state your name and association. All right. Hearing or seeing none, members, we will turn it over to you. Any questions or thought Assembly Member Grayson?
Grayson: Thank you, Madam Chair. I was hearing the testimony about APR versus ACC and it was almost like you— It sounded like it was apples and oranges, right, compared between the two. So, as long as the consumer or in this particular case the business owner that was seeking a commercial loan was aware that they were apples and oranges, then as long as they were aligning the apples together or the oranges together and comparing the right rates, then there wouldn’t be confusion. Is that right?
Patterson: I think that if people got past the similarities between them and actually sort of dug in, they could potentially say, “Okay. ACC is basically computed completely differently and is designed to be a different metric.” I think the hard part is when you just see APR, ACC and you see rates. People are making quick decisions and I think they’re gonna see 36%, 23% and just go with that. One of the other things I think that’s problematic here is that the underlying differences— I wouldn’t even begin to try to explain because trying to say why APR is computed one way and why ACC is computed the other way is gonna be complicated and take up a lot of time on the phone where people try to understand which one is the real one that they’re supposed to be looking at.
Grayson: Sure. So, if we were comparing products—
Patterson: Yes. Uh-huh.
Grayson: …whether that product from three different lenders was using APR, then I would have a fair comparison between.
Patterson: Yes. Apples-apples.
Grayson: So, if I had all three providers also providing an ACC and they were being compared strictly amongst just ACC, there would be a fair comparison.
Patterson: I would be. And I think the challenge that they will have in doing straight up real-time and apples to apples is going to be that credit cards will never be using an ACC.
Grayson: Right.
Patterson: They’re off doing their TLA, you know, program with the Schumer box and they’re gonna continue to use APR. A lot of small businesses rely on that. So, they’re gonna have an orange, an apple, maybe a couple apples. Maybe a pair. No. Just apples and oranges.
Grayson: I love fruit.
Patterson: You’re gonna have to try to figure. [Laughter]. You’re gonna try to figure it out. So, I don’t think there’s gonna ever be kind of a true, you know—
[0:20:01]
Grayson: Madam Chair, if I may, and I don’t wanna—
Limon: Yeah. No.
Grayson: …take up too much time and I know I have members here that may have concerns or questions. If I may to the author ask a question of what was the motivation to depart from an APR and come up with this new untested ACC?
Glazer: Thank you for the question, although I wouldn’t agree with the untested part. But originally in my bill, I did have APR and opponents came in and said, “We don’t want you to have APR because APR changes with every payment you make. It changes the number.” And they said it creates legal vulnerability for us to add that to use APR. And I said, “Okay.” The purpose here is not to curtail small business lending. We need that capital out there. The only issue I want is disclosure and I don’t wanna create legal liability. So, I said, “Okay. Because APR changes with every payment, let’s come up with another metric that’s not a new metric, but a metric in the world of business that says let’s take a snapshot in time of what that would cost over the course of a year.” And that’s why we annualize cost of capital (ACC). It’s not based on whether you make more payments this month or less payments next month. It’s one snapshot, thereby providing a fair estimate without legal vulnerability and a very simple standard and that’s where ACC has come from.
Grayson: You said without legal vulnerability because I know that’s been one of the concerns of ACC is that you could draw a figure out there and it actually not be the exact figure and it creates liability on the lender’s part. What have you done to be able to mitigate that liability?
Glazer: Because in the bill, it says an estimate. It says an estimate, an annualized cost of capital. So, that’s the required disclosure and that is something that I think provides appropriate legal protection for any lender who is providing that capital and that proposal too.
Grayson: So, within their disclosure, you’re saying if you put estimate on there, then that would help mitigate it.
Glazer: And I certainly haven’t heard any criticism on those terms in regard to ACC.
Grayson: All right. Thank you.
Glazer: Thank you.
Limon: Any other questions or thoughts? Vice Chair Chen.
Chen: Thank you, Madam Chair. I do want to say that, you know, as a Republican, one thinks that is always a concern is government overreach. This bill doesn’t do that. You know, my opinion, this is a bill which is helpful for the lender. It’s helpful for the consumer. It is information that is helpful in which will prevent them from making decisions that will be financial duress for them in the future. So, I appreciate bringing this bill forward. So, with that said, I’d be happy to move the bill.
Limon: [0:22:37][Inaudible]
Gabriel: Yeah. So, I was just curious for the opponents of the bill. If you’re opposed to ACC and you’re opposed to APR, is there a metric that you would recommend and suggest?
Patterson: Well, all of the members of ILPA do disclose APR now. So, we’re not opposed to APR. I think there were people in the business community. Let them speak.
Fisher: Yeah. Thank you. The total dollar cost of financing, which is not a percentage, but tells the small business owner this is how much the money will cost, that is the best metric and particularly because the goal is to provide a measurement that works across different products. So, that measurement works whether it’s a loan or a sale.
Gabriel: And is that something that’s already required to be disclosed?
Fisher: No. I mean, not by law. It is required to be disclosed by contract so that the customer understands what kind of financing they’re getting. And the members of the group I represent do provide disclosures like that.
Patterson: I would say that when we developed the SMART box and did a survey of small businesses part of that. Total cost of capital was something— Dollars and dollars out, at the end of the day, that is what is most meaningful to them. I’m not suggesting annualized metric or whatever. The problem with annualized metrics generally is that the shorter the term of the loan, they just look a lot— if it starts to fall apart under year. But to the point that you made, total cost of capital is something that business owners say is the metric and it’s why it’s at the top of our SMART box.
Limon: Assembly Member Weber.
Weber: Just wanted to get some clarity. Now, this SMART box that you have, how long have you had the SMART box? I mean, is this something that small businesses have access to and have for years or it’s something new?
Patterson: We launched it in June of 2016. So, it’s been around for 2 years.
Weber: Okay. But it’s not required.
Patterson: It is not. It’s a voluntary industry model. Anybody who joins the ILPA must disclose it as part of that membership. So, you have some of the larger lenders like OnDeck and Kabbage using it, but it is not mandatory. It’s not mandated by any government.
Weber: Okay. Okay. So, therefore, it’s kind of an uneven thing in terms of who has access to it or whether or not people know what the real cost of their loans are.
Patterson: Yes.
[0:25:00]
There’s no mandate to make these disclosures. That’s correct.
Weber: Okay. And the industry initially was opposed to APR and I assume they still are. I would imagine. Has there been some revelation—
[Crosstalk]
Fisher: Thank you. The financing companies that don’t offer loans, but offer a type of factoring program, they are opposed to any type of annualized metric because those types of transactions don’t have a term. The business only pays a percentage of its revenue as that revenue is created. So, the transaction will take as long as it takes the business to generate the revenue that they will then deliver to the company.
Weber: Okay. And I assume that any new system that you come up with will be untested. I mean, that’s the nature of something new. If it was not, it would be old rather than being something new. So, I’m not necessarily persuaded by the untested element of it. I think there needs to be some transparency. I was surprised that there wasn’t that much transparency in terms of commercial loans. I just assume everybody had transparency and knew what a loan cost. And so, I found it rather incredible that it didn’t happen. I’m not sure I’m convinced that ACC is the best thing, but I haven’t heard anybody tell me thing else. I know people don’t like the APR very much, but I think I heard that ACC is so horrible. I’m probably gonna support this as it goes forward with hopes that whatever problem there is you guys will work it out before it gets to the floor. I’m not sure that I will vote for it on the floor, but I do wanna give life to this so the conversation can continue because I think it is very important especially for small businesses. So, I’ll second the motion that was made.
Limon: Thank you, Assembly Member Weber. And I think we have Assembly Member Acosta and then Assembly Member Gabriel.
Acosta: Thank you very much. I kind of appreciate the discourse today. You know, I appreciate Senator Glazer coming by and having some significant conversations around this. It is a complicated issue when you’re talking about introducing a new metric by which consumers which— I know we’re calling them business owners, but they’re still people and they still have credit cards, and auto loans, and mortgages. And all these things are calculated somewhat differently. So, I think there is an opportunity here for more disclosure. I share my colleague’s— from San Diego— sympathies that this may not be the best answer because these things are all calculated differently whether it’s, you know, traditional factoring, whether it’s future receivables. My concern has been that as a consumer and a small business owner because they’re still individuals, they’re still people that you’re on one side of the fence and you’re getting a credit card offer or a small business loan offer from one entity on your credit card. It popped up on my screen from one of my bank statements the other day. And then over on this side, we’re doing something entirely different. And I’m concerned that there will be confusion there. I think of you have made attempts to try to address this. I think that we need good disclosure in this realm. Can you tell me just for the record the sunset date on this? We have a sunset of what?
Glazer: 4 years.
Acosta: 4 years. So, I’m not thrilled with no disclosure. I’m not sure this is 100% percent the way to go. But I think that given the fact that APR doesn’t work, ACC may not work, we gotta try something. You seem to be very interested in making something work. So, I really encourage you to work with, you know, the opposition to try to fix things to their liking and to really try to find something that small business owners can sink their teeth into. You know, maybe you’re gonna invent something new here that’s gonna carry throughout the rest of the country. I don’t know. I’m not 100% comfortable with the discrepancies that small business owners are gonna be finding themselves, but it’s a step. And so, I’m gonna be taking a look at this. I may lay off at this moment, but I’m leaning towards supporting your bill today just so we can continue to work on this, but I’m reserving judgment on the floor for what the final product is. Thank you.
Glazer: Thank you.
Limon: Assembly Member Gabriel and then Assembly Member Gloria.
Gabriel: Yeah. I just wanted to associate myself with the comments of my colleague from San Diego. I appreciate, Senator Glazer, your effort to do this and bring transparency to the space. I think that’s a very worthwhile objective. I’m inclined to support you today to continue the conversation, but then I’m gonna reserve judgment on the floor just to help myself understand this a little bit better, but very much appreciate what you’re trying to do here and thank you for bringing this bill forward.
Glazer: Thank you.
Gloria: Thank you, Madam Chair. And Senator, thank you for the bill today. I’m reading it furiously after being substituted just a few hours ago.
[0:30:01]
Sorry. It’s why the pass the medium-sized box. Right? I know you bring up a common sense approach here legislating. I was struggling with the conversation in terms of different metrics. I think I heard that part a bit. Forgive me if I missed the portion when you addressed one of the other things. In my quick read of this, what was somewhat troubling to me is the 4th page of the committee analysis talking about the ability or lack thereof to provide oversight or enforcement on this. It would seem to me then if we’re looking out for small businesses, we’d have to have some way of trying to actually enforce what you’re to do with this bill. It’s difficult for me to vote for something that says what it says here in terms of having— It’s either silent or it’s impossible to hold folks accountable so on and so forth. Can you speak to that and why the bill is at its current state with these comments?
Glazer: Absolutely. Thank you, Assembly Member. There are some that we like to regulate and the thing that we in our conversations about it that we’d rather start with this step of disclosure and not licensing and not regulation. And the hope would be that the marketplace can act appropriately, disclose appropriately and that can be the end of it. But under current law, if you have a contract dispute, you have the same remedies under this bill as proposed as you would in any other circumstance that you have today. And our public law enforcement officers have that same ability if they see violations to engage is appropriate. So, the same remedies that exists today, you know, are in place with the exception of regulation. And it was my view that— ‘cause you get folks from all sides on these kinds of things. And it’s a new engagement because it is the Wild West today. There is no requirement We heard from witnesses that she does this and they do that. There is no requirements anywhere in this space in California or across the country. And so, it was at that context that my feeling was— And we took a lot of amendments to narrow this bill and I can go through those. The first step should be a simple disclosure mechanism with a sunset and we can evaluate it as it goes. I don’t wanna curtail the lending market, whatsoever. But if we have bad actors that continue to not follow those rules, then I’m very open to trying to see what else is required. And that’s why we’ve taken a small step today that you see in front of you.
Gloria: So, this is not a matter of this will be addressed in a future committee or before it to the floor. It is the intent to leave it sort of open at least at this point.
Glazer: Again, given the various players in this space, the smaller step to me would seem to be the more appropriate step. No. It is not my intention to put a new regulatory framework under this bill. I think that makes it more difficult. And listen, if we didn’t have the opposition to APR from the start, we might be in a different place today, but I’ve tried to accommodate opposition and that’s why you have the narrowness of this bill before you.
Gloria: Okay. Thank you.
Glazer: Okay.
Limon: Assembly Member Gonzalez Fletcher.
Gonzalez Fletcher: And obviously, I don’t know what the opposition was to APR. All of this is new to me. I’m fairly new to this committee, but I am concerned with kind of— I don’t wanna say unsophisticated. But you know, my father has had small businesses and has made determinations whether he put something on a credit card versus takes out some sort of loan. Is the ACC always going to be smaller than the APR? I really know nothing about these things.
Glazer: It depends on the duration. It’s meant to say over 12 months. There’s a lot of loans and this is part of the problem in that space, is I say you need $1,000 for a pizza oven repair.
Gonzalez Fletcher: Right.
Glazer: And I say to you “Listen, I’ll give you $1,000. It will cost you $200.” And this is what the opposition said. The small business people wanna know what that total cost. Well, it’s $1,200 to get $1,000 now and you have to pay it back when? Well, you have to pay it back in 90 days. That interest rate that you’re paying is gonna be a lot higher than you can pay it back in a year or if you paid it back based on taking a penny out of every credit card transaction. So, when these lenders come in, they can offer you this wide array of ways in which it’s not gonna cost you anything to your dad and that’s been the challenge. The issue of the annualized cost of capital is to say whether you take that loan for 90 days or for 2 years. You have an annualized cost as if it was for 12 months and more importantly knowing how much it’s gonna cost you. You can shop the next vendor and the next financier and have an apples to apples to compare it to because one vendor may say, “Pay me in 6 months.” Another one will say, “Well, 18 months.” Well, what’s the difference?
[0:34:59]
And so, that annualized cost is a way to have that one standard review. And I did do a chart here to give you a sense of these are the standards required by the bill. And at the bottom of it, it says, “What’s the annualized cost of capital?” You have a way of reviewing that. This chart is based on $150,000 one time over the period of time. And so, each of these steps disclosed and then this is the last one, the bill that’s being debated today. What’s the annualized cost if you paid it over 12 months? This is a 15-month example, but this is what it would be over 12. And you can compare it from person to person or lender to lender.
Gonzalez Fletcher: As long as the product you’re getting is all from— Like I think what I’m struggling with is you’re making an assumption that they’re looking just at this one product, right, this online product and they’re not thinking through like “Well, I have space on this credit card. I have the ability—” You know? And if we’re not using the same percentage, then it’s biased to this because you’re gonna get a lower percentage. That’s what I’m concerned. Does that make sense?
Glazer: Yes. So now—
Gonzalez Fletcher: I feel really ignorant in this space. I have to tell you.
Glazer: No. No. And listen, welcome to the world of small business lending. Okay?
Gonzalez Fletcher: Right.
Glazer: Even us have struggle with it. So, this is an example based on 150,000 one-time loan paid off over— is it— about 3 years. Okay? Now, here’s another example of $150,000. But now, it’s paid off— let’s see here—
Gonzalez Fletcher: A little over a year.
Glazer: Right. A little over a year and it comes from money out of your— See, it says— Let’s see. Okay. This is the 15-month loan one time. This is money out of your cash register over a much longer period of time. And you can see how these charts then work out. Under this one, they’re both $150,000. This is the total cost of all your payments. This is 170. That’s 179. Here’s your financing costs under this example. It’s 20,000. On this example, it’s 29,000. Here’s how much you paid everyday. If what’s most sensitive to your dad was how much he had to put out everyday, this one is $370. That one is $163. And so, you work down this chart and then you say, “Well, what if I had to pay this over 1 year?” The apples and apples, this is a 10% cost and that one is a 6% cost, but you can get a sense of the complexity of these. Just two different examples. A flat loan versus something that you’re gonna pay off everyday out of your cash register. And this is the dilemma that they all face. How do you create the apples to apples with these different products? And this shows you that you can have different products with different loan amounts and different directions, but the one thing that you can compare the apples to is the annualized cost of capital in both charts. They’re never gonna give you an APR and an ACC. They’re gonna just show you the— whatever the law requires is what they’re gonna provide. And this is a way for you to cross comparison shop that doesn’t exist today.
Gonzalez Fletcher: Okay. So, I’m sorry. So, I get how you can compare these two. And I applaud what you’re trying to do. I think this is good. My concern is how do you compare this to my business credit card or something that’s giving me just an APR?
Glazer: That’s a consumer loan and that is a—
Gonzalez Fletcher: But small businesses use credit in a variety of way. I mean, I guess you can say loan, but I mean especially small businesses use a variety— I’m just worried about that like are we— This makes very good for what you are trying to do, but that’s not the only way people borrow money to—
Glazer: Right. And the challenges that the credit card APR— it’s based on how much you pay and when. In other words, that’s just an estimate, but it’s a changing estimate every month. If you decide to only pay so much in the principal, that’s gonna change that number. And so, that’s the dilemma of even looking at that financial instrument of if I put this on my credit card versus take out a business loan. It’s a very challenging thing for anyone to understand because— And that’s why I go back to the simplicity, is the annual cost, not an APR that fluctuates. And obviously, some in the industry say we love it and some say they hate it and wanted a change in the bill. And that will always remain that dilemma. Buyer beware, lender beware. We’re just trying to give that small business owner one additional tool and that’s not how much is the money gonna cost me or how much do I pay everyday. What would this cost if I had it for 12 months?
Gonzalez Fletcher: Why wouldn’t you have both?
Glazer: Well, we do. The bill does require that all these elements be provided.
Gonzalez Fletcher: No. APR and ACC. Why wouldn’t you have both?
[0:39:59]
Glazer: Well, first, we had the concern on APR about the legal jeopardy of that number fluctuating and how can you have it be a fair estimate.
Gonzalez Fletcher: How do they do it on credit cards? I get a credit card or I’m applying for a credit card and it tells me this is the APR and that’s [0:40:13][Inaudible]
Glazer: There is about a stack of federal regulation this high that went into that high plus more that have gone into the whole determination of APR. And when you say it’s been around a long time, it’s been hotly debated on the federal level. And so, you have this body of information that’s now there that guides companies in how they do it and how they calculate it.
Gonzalez Fletcher: So, these companies could do that.
Glazer: They could do that today. Most of them don’t. I’m happy to hear one that does provide it. But again, it’s the Wild West, so—
Gonzalez Fletcher: So, why wouldn’t we want both? I mean, there’s a function to do it and then it could better cross compare between different products. I meant more disclosure, not less.
Glazer: Yes.
Gonzalez Fletcher: I’m not like setting you— I have no idea. I’m totally confused on trying to do the right thing in this bill, so—
Glazer: Yeah. Well, look, I’m open minded. For me, the fundamental issue is how do we provide an appropriate level disclosure to give that small business person a fighting chance in the lending market. I hadn’t thought about whether providing both and whether that would be helpful or less helpful. I’m open minded to it. I’ve been trying to simplify this because there’s been a lot of efforts to complicate it and that’s why I hadn’t gone in that direction, but I’m still open minded about whether that would be more helpful or less.
Gonzalez Fletcher: Well, I would say for a lot of small businesses and I think that small business is my community where you have a lot of non-English speakers, a lot of non-native speakers being able to actually look at two completely different products. One that’s maybe not supposed to be used for small business loans. But as a credit card versus this to line up the letters regardless of how you get to that number and what it means, but line up the letters and try to get to some comparison would be helpful rather than assuming the level of knowledge I think that even if it was in their home language, probably— I mean, it’s beyond me and I consider myself slightly educated, but definitely with folks who are new to this country and who are trying to figure this all out I’m a little concerned. That’s all.
Glazer: Yeah. Thank you.
Limon: Thank you. Assembly Member Steinorth.
Steinorth: First, I just like to say I think this is very clever. I’ve been in business for over 20 years and my business is helping local and small businesses grow. I’ve been doing that successfully. I’ve probably helped over 10,000 businesses be successful and the single greatest reason for their failure is under capitalization. Period. That’s it. And so, short term versus longer term access to capital, I believe that your way of— I’m really trying to add the transparency to the short term access to capital so people have a clear understanding of what it’s going to cost their business. It’s gonna be very useful for their success.
Glazer: Thank you.
Steinorth: So, I’ll be voting yes on this bill. Thank you.
Glazer: Thank you. I appreciate it.
Limon: Thank you. Senator, you and I have had multiple conversations about this and I think the analysis does express some concern with the ability to enforce particularly because enforcement is also a way to ensure that your objective is met. It’s not just an enforcement mechanism, but it’s also about the objective. But we’ve also had conversations about the direction of the bill and knowing how important it is for any, you know, consumer to have the information they need to make the best decisions. What I’m hearing is that at this point APR— You’re lucky if you have it. Some do. Some don’t. It’s not a standardization. And so, as I listen to colleagues bring concerns forward about how do you compare all of your options, not just your online lending, but all of your options, I also understand that currently that can’t exist because if they— Right now today, if they were to try to go to an online loan or a cash advance and also compare credit cards, they don’t have the mechanism to look at it apples to apples. I appreciate that this is at least for the moment a temporary solution. It has a 4-year sunset so that we can understand. I still continue to have concerns about how the objective is going to be met, how we know that whether it’s ACC or something else is going to be met, and how we’re ensuring that over the next 4 years potentially all the consumers or customers of this product see the same thing. I’m not sure. But there are certain themes that you have brought forward, themes that I have been very sensitive to this year in the world of banking and finance. And those include the importance for transparency, for disclosure, and for people to understand the true cost of a loan.
[0:45:08]
I understand how hard it is for these things or these elements to be in place with a lot of products. And for those reasons, I’m going to give you an aye vote in good faith that we can try to get there, but I will note that there are still some concerns and I’m happy to be part of any kind of conversation to make sure that the objective you’re trying to get to is one that is able to be met. And I know how hard this work is. And with that, if there are no other comments, I think we will have you close and then we’ll take a vote. Thank you.
Glazer: Thank you, Madam Chair and members, for this thoughtful, thorough conversation that we’ve had today. I appreciate it. I wanna underscore again how hard we have worked (my staff, your staff, and others) to try to narrow the differences, take out leasing, take out some of the receivables issues that we can’t really fit into this box so that we could provide something that’s simple, and easy, and understandable, and transparent. I think we’ve gone a long ways here. I know there’s more work still to be done and I’m happy to look— I look forward to that work that we can do together. We do need to protect our small business people. And it is a Wild West of financing out there. And I think this bill does get us closer to that space and I appreciate your consideration. Thank you.
Limon: Thank you. Please call the roll.
Speaker: Limon.
Limon: Aye.
Speaker: Limon aye. Chen:
Chen: Aye.
Speaker: Chen aye. Acosta.
Acosta: Aye.
Speaker: Acosta aye. Burke. Gloria. Gabriel.
Gabriel: Aye.
Speaker: Gabriel aye. Gonzalez Fletcher. Gonzalez Fletcher not voting. Grayson.
Grayson: Aye.
Speaker: Grayson aye. Steinorth.
Steinorth: Aye.
Speaker: Steinorth aye. Stone. Weber.
Weber: Aye.
Speaker: Weber aye.
Limon: All right. The motion is do pass and that is out 7-0. We will leave the roll open for additional add-ons.
Glazer: Thank you very much.
Limon: Thank you.
Glazer: Thank you all.
[0:47:24] End of Audio
Bureau of Consumer Financial Protection Hires Fintech-Knowledgeable Attorney to Lead New Innovation Office
July 20, 2018
Acting Director of the Bureau of Consumer Financial Protection (Bureau) Mick Mulvaney announced this week that he has chosen Paul Watkins to lead the bureau’s new Office of Innovation.
According to a statement released by the agency, Mulvaney has created this new office to encourage consumer-friendly innovation, which Mulvaney says is a key priority for the Bureau. Much of this is already taking place under the agency’s “Project Catalyst” program. This work will now be folded into the Office of Innovation.
The agency statement said that the bureau intends to fulfill its statutory mandate to promote competition, innovation, and consumer access within financial services. To achieve this goal, the Bureau says it will focus on creating policies to facilitate innovation by engaging with entrepreneurs and regulators, and reviewing what it may deem to be outdated or unnecessary regulations.
“I am delighted that Paul Watkins is bringing his deep expertise, track record of protecting consumers, and commitment to innovation to the Bureau,” Mulvaney said. “I am confident that, under his leadership, the Office of Innovation will make significant progress in creating an environment where companies can advance new products and services without being unduly restricted by red tape that belongs in the 20th century.”
Prior to joining the Bureau, Watkins was the Chief Counsel for the Civil Litigation Division at the Arizona Office of the Attorney General. In this role, he managed the state’s litigation in areas such as consumer fraud, antitrust, and civil rights. He was also in charge of the office’s fintech initiatives, where he managed the FinTech Regulatory Sandbox, the first state fintech sandbox (or incubator) in the country.
The Bureau was created under former President Obama as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. It was initiated by Democratic politicians and has never been very popular among Republicans. Mulvaney has been applauded by Republicans for loosening regulations, but he is only there temporarily as the Acting Director. President Trump’s nominee for a permanent director of the Bureau is Kathy Kraninger, who was questioned yesterday by Senate Democrats.
According to The Washington Post, during yesterday’s questioning, Sen. Elizabeth Warren of Massachusetts, who was one of the key creators of the Bureau, accused Kraninger of “dodging” questions and giving “lawyerly and limited” answers. Republicans were pleased with Kraninger’s responses and are hopeful that she will be confirmed.
Meanwhile, a June court decision declared that the Bureau as an entity is unconstitutional because of its single directorship structure which gives the director too much unchecked power.
